Premium AI valuations are justified by growth trajectories, says Citi's Drew Pettit

Market Overview & Strategy - The soft landing trade is currently in effect, but structural and fundamental improvements are needed for consumer discretionary and small-cap sectors to continue outperforming beyond a tactical trade [2] - A bullish narrative for the second half requires cyclical sectors, including consumer discretionary, to perform well and contribute to earnings growth beyond growth-led sectors [7] - The market is currently pricing in a lot of good news, and sentiment is somewhat stretched, requiring earnings season to deliver [12] - Risk-reward is slightly more to the downside than upside, but a bullish case depends on more factors contributing positively [15] Investment Opportunities - AI remains a favored growth theme, with opportunities potentially underpriced in many stocks [4] - Consider AI plays outside the US to complement structural growth names already prominent in the index [4] - Focus on companies globally that are improving quality and efficiency, regardless of the economic backdrop [9] - Companies that are users or adopters of AI tools, like SAP, represent investment opportunities as structural improvers not yet priced to perfection [10] Risks & Concerns - Consumer matters for a bullish second half, with potential issues including inventory pulled in ahead of expected tariffs and credit issues affecting working-class consumers [5][7] - Short-term caution is advised, echoing Jamie Dimon's warning about market complacency on tariffs [10][12] - While not the base case, a surprise Fed rate hike would negatively impact equity markets [11]